THE "ELEPHANT IN THE ROOM" IS NOT A REPUBLICAN

During the Great Depression of the 1930´s, many small-town banks closed. That is the same issue today.

…Federal Deposit Insurance Corporation Building

Unfortunately, when President Bush decided to bail out the banks that were "too big to fail", he didn´t seem to care that many of those that "weren´t too big", would eventually fail. And that is the "Elephant" that is happening today.

Last week, the milestone of the "100th US bank failure of 2009" occurred, and there will be an additional number of small US bank failures before the end of the year.

The Federal Deposit Insurance Corporation (FDIC) that covers the deposits of these failed banks was previously flush with resources for covering this emergency. However, per the New York Times, "Burdened by worsening commercial real estate loans, many small banks´ troubles are just beginning. Many analysts say that the now-toxic loans could sink hundreds of small lenders over the next few years and place a significant drag on the economy. Already, the bank failures are placing enormous strain on the FDIC and its fund, which keeps depositors whole. Flush with more than $50 billion only two years ago, the fund recently fell into the red. The prospect of more failures has led the FDIC to seek new ways to replenish the fund with higher and earlier payments by healthy banks, even after setting aside reserves for future losses."

While the parade of failures still represents a mere fraction of America´s small banks, it underscores a growing divide between them and the large banking institutions (That we taxpayers bailed out.) like Goldman Sachs, JPMorgan Chase and U.S. Bancorp, which are today slowly growing stronger as the economy improves.

Just as Wall Street and the big banks were being bailed out, (while the country´s unemployment rate was going through the roof), the "Big Boys" were all covered and they are still getting their big salaries and bonuses. Unfortunately, those smaller, home-town banks that did the same things as those that were being bailed out, some will now have to just "lay down and die" while putting more people on the street without jobs.

The pace of bank failures is expected to accelerate in the coming months. There were just 25 bank failures in 2008 and just 10 in the five previous years. But in September alone, regulators took over 11 banks in nine states that were saddled with the toxic commercial real estate loans.

Actually, not all of the failed banks will close their doors. In what has now become the ritual, the FDIC swoops down on the latest troubled lenders virtually every Friday afternoon. They then seize the assets and put them into the hands of another bank. (Some of which were bailed out by those tax-payer dollars.)

This wave of failures has unsettled some smaller communities, even though most of the troubled institutions will be bought by other banks rather than shuttered down. While the deposits are safe, thanks to the federal insurance, the new buyers often do not have the same ties to the local businesses as did the former owners.

In some cases, the new bank owners tighten lending and make it harder for longtime local customers to obtain loans or favorable terms, regardless of their qualifications. In other cases, managers of the newly acquired banks make additional changes like ending offers for high-interest certificates of deposit or calling in certain lines of credit. In the long term, in order to cut costs, some new owners are likely to review their various bank branches and they will likely close the lower performing operations.

The areas in the country that are most at risk are in the South and the Midwest where the recession has hit the hardest. Regulators expect closures to ripple through hundreds of small banks over the next couple of years. Needless to say, the number of actual banks is a very small percentage of the total number of US banks. But once again, we learn why the GOP´s support of allowing companies and banks to merge or to grow to a point of becoming a monopoly or "too big to fail" is not a good idea. Whether it is just for good competition or for the massive negative effect a failure could have on the US economy, "size does matter". And "bigger" is not necessarily "better".

So, what actually caused these banks to fail?

Most of these small banks had made hundreds of loans to home builders and other property developers which made up for the business they had lost in credit card and mortgage lending that the bigger banks had taken away. They had also eased their lending standards during the recent boom years and they made big bets on new local housing developments, strip malls and office projects. Now, with the recession in full-bloom, many of these deals were falling apart which forced the lenders to scrambling for raising capital to cushion the losses.

Per John R. Chrin, a former investment banker; "These banks were big enough that they could do loans that were fairly sizable. If the loans go bad, they [the banks] are toast."

The good news is that for those that remember the "Savings and Loan Crisis" of the 1980´s and 90´s, the current bank failures are not expected to be near that level of a disaster. During that period, nationally over 700 lender-operations were closed.

However, per Ms. Sheila C. Bair, the chairwoman of the FDIC, Ms. Bair said the savings-and-loan crisis far surpassed the current situation. "We aren´t anywhere close to that today, and based on current projections, I don´t think we will get near that pace".

Even if hundreds of banks collapsed, they would not threaten to bring the financial system to its knees. Together, the 8,176 smallest banks control just 15% of the industry´s $13.3 Trillion in assets. And thanks to the expansion of the government´s deposit insurance program, regulators also appear to have squelched the threat of bank runs that brought down IndyMac Bank and Washington Mutual last year.

Consumer deposits are now also insured up to $250,000 per account, and the FDIC offers unlimited coverage on noninterest payroll accounts used by businesses.

"We´ve passed the panic stage," said Frederick Cannon, the chief equity analyst at Keefe, Bruyette & Woods in New York.

What is more, the community bank supporters say the bulk of their institutions will emerge from the crisis stronger. "The community banks are picking up market share," said Camden R. Fine, the head of the Independent Community Bankers of America.

"People are angry with all the shenanigans on Wall Street," he said. "They believe their money stays local when they put it in a community bank, rather than send it off to Never-Never land."

Let´s just hope that all of this optimism going forward has a good foundation. Otherwise, all those radio ads about buying "gold" might start sounding like the best way to go.

Copyright G.Ater 2009

Follow me on Twitter: gater01